Home Sales Fall on Credit, Cancellations, Confidence

July's existing home sales, which represent contract closings, came in well below expectationsof a two to three percent gain, falling 3.5 percent month to month.

While analysts called for an increase, based on several months of rising pending home sales (contracts signed), they did not give enough weight to the three biggest issues plaguing the market, starting with tough credit conditions.

"Frustrating," was the word used over and over by National Association of Realtors chief economist Lawrence Yun at this morning's press briefing. Poor appraisals, or appraisers using distressed comparisons to non-distressed homes, sent a lot of buyers and sellers back to the drawing board. Tighter lending standards and "overly strict underwriting" were enough to offset record-low mortgage interest rates. All that led to an elevated level of cancellations.

Last month the Realtors reported 16 percent of all agents surveyed saying they had at least one contract cancellation. There was some confusion, as many reported that it was 16 percent of all contracts canceled. Given that the metric is based on the former, total cancellation rates could actually be far higher, as many agents likely saw more than one contract canceled. The Realtors were also careful to point out this month that these cancellations are not all based on "cold feet," as many of us media types reported last month, but much of it was "bank-related issues," like declined mortgage applications and, again, poor appraisals.

One glaring credit issue in this report comes from the sales figure out West, down 12.6 percent month to month. Yun said, "California mysteriously halted," but it may not be so mysterious at all. Yesterday we reported that Wells Fargo has stopped taking applications and locking in rates for conforming (Fannie, Freddie, FHA) loans above the new loan lower limits that go into effect October first. Others are likely doing the same and some started earlier in the summer. Lower GSE/FHA loan limits, falling from $729,000 to $625,000, affect the highest priced markets, like California. If lenders were already capping California in July, as Yun says his Realtors are reporting, there is your crystal ball into what's about to happen in the rest of the nation's higher priced housing markets. Steep sales declines.

And then there is confidence, or lack thereof, which certainly played a big role in July sales. "Buyer confidence has weakened, underlying factors for improving home sales clearly exist this year compared to last, more jobs, the higher rent, the price to income ratio very favorable, and yet we're not seeing that many buyers come into he market," says Yun. The debt crisis, still-weak jobs picture, talk of a double-dip recession. Yun put it best: "Economic catastrophe are not good words for buyers."